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The Union Budget is round the corner, Will this budget heal the demonetization pain?

The Finance Minister (FM) ArunJaitley will present NDA’s fourth budget under the current term on February 1, 2017. We believe that the government is likely to relax its FY2018E fiscal deficit target of 3% by 30-50 bps. This is likely to increase its spending ability by `50,000cr-`80,000cr in FY2018E. While this could move the focus away from fiscal discipline path, the possible gains of ~`1lakh crore by taxing the black money deposits would support the government’s spending in FY2018E. We are positive on the interest rate, as banks are expected to witness lower cost of funds by retaining the low cost deposits received through demonetization. Overall we expect 1) increase the tax slab limits to boost consumption, 2) Infrastructure spending to revive capex cycle, and 3) rural schemes to remove distress from rural economy.

Demonetization has created short term pain for the economy

The sudden liquidity crunch after the note ban has seen consumption sectors such as auto, real estate, building materials, consumer durables, etc., take a severe beating. The rural economy has also been adversely affected, as cash crisis led to a slowdown in the small scale businesses resulting in job losses. However, the economy is expecting remedial action through the budget.

One-off gain to maintain fiscal discipline

Over the last three years, government has achieved significant progress towards achieving Fiscal Responsibility and Budget Management (FRBM) Act target of 3%. The government is likely to step up rural infrastructure spending, which may partially pressurize its financials; however the one-off gain of ~`1 lakh crore by taxing the black money deposits supports these spends without pressurizing the financials. The collection of lower one-off taxes, however, may pose risk to FY2018E fiscal deficit.

Budget likely to take corrective measures

We believe that the government is likely to take corrective measures which would offer remedy to the demonetisation wounds. In our opinion, increase in individual income tax slab limits and reduction in corporate tax rate is expected to be the highlight of the budget in order to revive the consumption cycle. The PM’s address on December 30, 2016 announced various corrective measures to fix the rural economy, such as affordable housing, interest subvention, credit support for small businesses, etc. We expect more measures in the upcoming budget to remove distress from rural economy.

Before we try to gaze at what it might have in store, there are 4 points to be noted at the outset:

1) Deviating from the tradition of presenting the Union Budget on the last day of February, this year the Budget will be presented on the 1st day of February. This is primarily from the point of view of getting the Budget announcements implemented from the 'beginning' of the new fiscal instead of its implementation after a few months into the new fiscal.

2) Almost a century old practice of presenting a separate Railway Budget is getting done away with from this Budget onwards, as the Railway Budget presentation is getting merged with the Union Budget.

3) The Budget date is just a few days ahead of the elections in 5 states, which includes the politically crucial state of Uttar Pradesh. This holds significance considering the fact that the Union Budget (including the Railway Budget) is an event wherein various social and welfare schemes get announced, tax and fiscal incentives are given out, the influence of which on the voter community is debatable.

4) The Budget will be presented in the backdrop of the government's recent demonetization drive, which has had an impact of varying degrees across sectors and has perceptibly affected both – consumer and business sentiments.

Of the above, while points 1 & 2 are just facts-to-be-noted, point 3, though important, the decision w.r.t. the Budget presentation date is as yet pending with the Election Commission. However, whether the eventual date will have a significant bearing on the final contours of the Budget is difficult to guess, we believe it is point 4 that is of relevance this time around.

Reeling under the challenges posed by the government's demonetization drive, businesses and consumers at large have seemingly built high expectations from the Budget. These largely revolve around getting reliefs aimed at higher disposable income in the hands of the population and/or improving affordability, which in turn will aid in improving consumer sentiments and support business and economic growth.

Higher tax exemption limits, lower duties on products, higher tax incentives to encourage home buying, incentivize savings, etc. are among the usual desired expectations, which will help in meeting the objective of improving consumer and business sentiments to a certain extent. Apart from these, in wake of the short-term impact witnessed on the rural and the informal segments of the economy, the government is expected to enhance its focus here.

Notably, while the government has already expressed its intention to double farmers' income by the year 2022 and this Budget could spell few measures aimed at this, the MSME segment, which has also been adversely impacted on account of it representing a good part of the informal economy with cash being the primary exchange for transactions, is also expecting few relief measures to flow its way.

Focus on government's pet projects like Make in India, Digital India and Swachh Bharat are expected to continue to receive considerable attention considering the potential objectives that can be achieved through these. While the Make in India and Swachh Bharat campaigns can be a great source for job creation considering the investments that they could attract, strengthening of the Digital India campaign will support the government's initiative of transforming the Indian economy to a less-cash economy.

Efforts at job creation and lifting the rural economy, which has been particularly impacted post-demonetization, is likely to be amongst the key agendas, which could be addressed through greater focus on agriculture and micro small and medium enterprises (MSME) sectors. Increased emphasis on the latter will aid in the revival of investment cycle, which will boost credit demand in the system.

On the taxation front, the expectations of a largesse are high by consumers and the business community alike in wake of the pain inflicted by the recent demonetization drive and are looking up to the government to bring things back to normalcy in the economy. However, considering the fact that the government's financial gains in the near-term have been restricted from the demonetization drive, its capability to deliver an out-of-theordinary budget also gets curtailed.

Nonetheless, to alleviate the challenges recently cropped up in the economy, and also with an eye on the upcoming state elections, tweaking in personal income-tax slabs could be announced. Further, with the Finance Minister having indicated in his earlier Budget the reduction in corporate tax rate, the current Budget is an opportune time to initiate this move. The Service Tax, however, may be hiked to move towards greater alignment with the GST rates, which is expected to be implemented in 1HFY18.

On the Fiscal path front, while the government has targeted a fiscal deficit of 3% of GDP, considering that it will have to be the front-runner in pump-priming the economy in wake of lack of private investments, a 25-50 bps increase may be considered by the government.

In conclusion, we expect the Budget to keep its focus relatively higher on the rural economy and the various social and welfare measures related to healthcare, education, agriculture, etc. along with investments in infrastructure / housing. This is primarily in wake of the challenges thrown up by the demonetization drive and the upcoming state elections. But with the limited benefits yielded by the former to the government in the near-term, it is unlikely that the government has much scope to deliver a 'populist' budget. Nonetheless, in terms of sectors, we expect Infrastructure (Roads / Power / Cement), Housing (Banks / NBFCs), Agriculture (Agro-chemicals / Irrigation / Fertilisers / Tractors) and Rural (Consumer Durables / FMCG) to benefit from the budget announcements.

Lower interest rates + tax cuts = Consumption boost

We believe that government’s aim is to leave consumers with more disposable income and fuel the consumption demand. Therefore, increase in tax slabs and lowering corporate tax rate will play an important trigger, as interest rates have come off in a big way. With banks retaining low cost deposits, their cost of funds is expected to remain low for a long period, indicating that interest rates will also remain low going ahead. The low interest rate and low taxes would accelerate revival in consumption demand.

Budget conviction picks

With the focus on tax reduction we expect consumption sector is likely to be a direct beneficiary from this budget. We expect FMCG, consumer durables, automobile sectors to benefit going ahead. We prefer companies like ITC, P&G, Asian Granito, Mirza International, etc. in this space. We also expect the credit cycle to revive with lower interest rates and government’s impetus on housing sector and companies like Axis Bank, LIC Housing and DHFL to remain our best play. We like L&T, Powergrid and KEI industries in the infrastructure space. 

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Events to watch this week

• Trump sworn in as US president
• China’s Xi: No one will win a trade war
• IMF sees fast US growth
• Draghi: ECB rates to stay low for an extended period

The Week ahead:

• Global flash purchasing managers’ indices are released on Tuesday, 24 January
• US existing home sales data are reported on Tuesday, 24 January
• The UK Q4 gross domestic product is released on Thursday, 26 January
• The US Q4 GDP is released on Friday, 27 January

For the week,Global equities were little changed on the week as markets awaited clearer policy signals from the incoming US administration. Steady US 10-year-note yields of 2.42% greeted the new president, virtually the same yield that prevailed when Barack Obama was first sworn in eight years ago. West Texas Intermediate crude fell slightly from a week ago, to $52.60 per barrel from $53, while global Brent crude dropped to $55.40 from $56. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 12.4 from 11.20 a week ago.

NIFTY- 8,349.35
CRUDE OIL-Rs 3,642barrel
GOLD-Rs 28,612 gram
Rs/$-Rs 68.18

MARKET ROUND UP

Indian equity benchmark indices the S&P BSE Sensex and the Nifty 50 index closed the week ended Friday, 20 January 2017 on sour note. The trading for the week was lacklustre during four trading sessions from Monday, 16 January to Thursday, 19 January 2017, with a range-bound trading, amid mixed global cues. Albeit, a noticeable slide on the bourses on Friday, 20 January 2017, pulled key indices lower.

The slide on the last trading session of the week is attributable to the caution ahead of US President-elect Donald Trump's inauguration later in the global day on Friday, 20 January 2017. Markets across the globe await a clear cut direction from Trump on US' economic policies.

The Sensex lost 203.56 points or 0.74% to settle at 27,034.50. The Nifty declined 51 points or 0.6% to settle at 8,349.35.

In the broader market, the BSE Mid-Cap index shed 0.43%, with the decline in this index lower than the Sensex's decline in percentage terms. The BSE Small-Cap index bucked the market trend by advancing 0.56% during the week.

Macro Economic Front:

On the Economic Front,data showed during market hours on Monday, 16 January 2017 that inflation based on wholesale price index (WPI) rose 3.39% in December 2016 from 3.15% in November 2016. Another data showed after market hours on Friday, 13 January 2017 that India's trade deficit declined 9.9% to $10.37 billion in December 2016 over December 2015.

The International Monetary Fund (IMF) on Monday, 16 January 2017, cut India's economic growth estimate for 2016-17 to 6.6% from its earlier projection of 7.6% due to the impact of the government's move to scrap some high value currency notes in early November.

Major Action &Announcement:

TCS rose 1.57%. The company announced a partnership with Aurus, Inc., a global leader in innovative payments technology, to deliver payment solutions for retailers using TCS OmniStore, a first of its kind unified store commerce platform. The announcement was made after market hours on Monday, 16 January 2017.

Infosys declined 2.7%. The company announced its internal carbon price at $10.5 per ton of CO2e, at an event organized by the Carbon Pricing Leadership Coalition (CPLC) in Zurich. A significant milestone for Infosys, the price will be applicable for a period of two years and will represent the cost of decarbonizing 1 ton of CO2e. The announcement was made after market hours on Monday, 16 January 2017.

State Bank of India (SBI) advanced 0.04%. The bank said that it concluded the issue of $500 million fixed rate senior unsecured notes having a maturity of 5 years at a coupon of 3.25% payable semi-annually. The announcement was made after market hours on Tuesday, 17 January 2017.

Maruti Suzuki India fell 0.51%. The company launched the much awaited premium urban compact vehicle for the millennials, IGNIS. The announcement was made after market hours on Friday, 13 January 2017.

Mahindra & Mahindra (M&M) lost 2.1%. The company announced its foray into Turkey, through the acquisition of HisarlarMakinaSanayiveTicaretAnonimSirketi (Hisarlar), a farm equipment company based in Turkey. The announcement was made during market hours on Friday, 20 January 2017.

Coal India lost 3.51%. The board of directors of Central Coalfields, a subsidiary of Coal India approved revision of coking coal prices on 14 January 2017. The increase in price is done by subsuming the washery recovery charge (WRC) which was being charged separately in the case of non-linked washery grade coking coal keeping in view the observation of ADRM. The announcement was made on Saturday, 14 January 2017.

NTPC fell 0.32%. The company said that first unit of 250 megawatts (MW) of Nabinagar Thermal Power Project of 1000 MW capacity of Bhartiya Rail Bijlee Company, BRBCL-a subsidiary of NTPC was declared on commercial operation from 15 January 2017. The announcement was made during market hours on Monday, 16 January 2017.

Tata Steel advanced 1.84%. CARE Ratings downgraded the credit ratings of the company's unsecured non-convertible debentures (NCDs), long term unsecured rupee loan and unsecured subordinated perpetual securities by 1 notch citing uncertainties relating to the disposal/restructuring of Tata Steel UK business. The announcement was made at the fag end of market hours on Thursday, 19 January 2017.

Global Front:

In Overseas Markets,UK Prime Minister Theresa May in a speech on Tuesday, 17 January 2017, indicated Britain will press for a firm exit from the European Union. May said she'll put the terms of the country's exits from the EU to a parliamentary vote. Setting out a vision that could determine Britain's future for generations and the shape of the EU itself, May answered criticism that she has been coy about her strategy with a 12-point plan for what has been dubbed a hard Brexit.

Among economic data in US, industrial output accelerated last month at its strongest pace in two years. The housing-market index from the National Association of Homebuilders showed that builder sentiment slipped in January after notching its highest reading of the business cycle in December. Despite the drop, the January number was the second-highest reading of the cycle.

The European Central Bank held rates and its bond-buying program steady at its Thursday's (19 January 2017) meeting. The bank's President Mario Draghi said the governing body stood ready to intervene further if conditions worsened.

Global Economic News:

Trump vows to restore America’s promise
In his inaugural address, President Donald Trump pledged to transfer power from Washington, D.C., back to the American people. He called for defending the US’s borders while rebuilding its infrastructure. Every decision, whether on trade, taxes or immigration, will be made to benefit American workers and families, he said. While he expects other nations to put their interests first as well, he said the United States will reinforce old alliances and build new ones.

China’s Xi warns on trade war risks
In the first appearance by a Chinese leader at the World Economic Forum in Davos, Switzerland, President Xi Jinping defended globalization. He cautioned other countries against pursuing protectionist policies, adding that no one will emerge as a winner in a trade war. On the domestic front, Xi said that the economy has entered a new normal, driven by household consumption. He affirmed a 6.7% 2016 economic growth target, in the middle of the government’s 6.5%–7% range, but the slowest since 1990.

IMF ups US growth forecast
The US economy will grow 2.3% this year and 2.5% in 2018, according to freshly revised International Monetary Fund forecasts. The IMF raised its forecast by 0.1% for 2017 and 0.4% for 2018. The global growth outlook remained steady from October estimates of 3.4% this year and 3.6% in 2018. The fund estimates that the global economy expanded 3.1% in 2016.

Banks heading for the Brexit?
This week, several banks announced plans to move staff out of London in the wake of Brexit, including HSBC and UBS. Meanwhile, Germany’s Handelsblatt reported that Goldman Sachs may relocate half of its London staff of 6,500. Some jobs will move to New York, while approximately 1,000 could move to Frankfurt, the paper reported. UK prime minister Theresa May this week outlined her plan to put Brexit to a vote in Parliament before triggering Article 50. She said she expects the United Kingdom to leave both the European Union’s single market and its customs union.

GLOBAL CORPORATE NEWS

Draghi says rates to stay very low even after halting asset sales
Interest rates will stay low or head even lower for an extended period, European Central Bank president Mario Draghi said on Thursday, after the Governing Council left its monetary policy unchanged. Draghi looked past a recent uptick in European inflation measures and said the ECB is ready to increase the size of its quantitative easing program, if needed. The Bank of Canada too held policy steady this week, though Governor Stephen Poloz maintained that a rate cut is an option if the Canadian economy takes a hit from more protectionist US policies. Poloz’s dovish tone sent the Canadian dollar lower. US Federal Reserve chair Janet Yellen said Thursday that the Fed is close to its goals and that she expects to hike rates "a few times” this year. Futures markets have just over two 25-basis-point hikes priced in at present. Yellen added that allowing the economy to run persistently hot would be risky and unwise.

NEW 52-WEEK HIGH BSE (A):

NEW 52-WEEK LOWS BSE (A):

MAJOR WEEKLY GAINERS IN BSE A CATEGORY:

MAJOR WEEKLY LOSERS IN BSE A CATEGORY:

Eyes will be set on the certain US economic data releases are:

Monday (23 Jan)
No Major Data
Tuesday(24 Jan)
Existing Home Sales

Wednesday(25 Jan)
MBA Mortagage Applications
Thursday(26 Jan)
Jobless Claims& New Home Sales
Friday(27 Jan)
Consumer Sentiment

Fundamental Pick of the week:

Accumulate PTC India Financial Services Ltd For Target Rs.50.00

Investment Rationale

* PTC India Financial Services (PFS) is a non-banking finance company promoted by PTC India (60% stake). PFS has been granted the status of Infrastructure Finance Company by RBI. It offers wide range of debt and equity linked financing products meeting the financing needs of power projects and is exclusively devoted to power sector.

* PFS, initially, had the largest exposure to thermal power projects at ~60% till FY12, primarily sourced as a reference from parent company PTC India. The company is now able to garner business on its own with focus on small and medium renewable power projects, which constitute 44% of the overall loan book and garner better yields.

* NIMs (~6%), ROE (~16-20%) , ROAs(~3%) have remained stable for the company . Asset quality has deteriorated over FY15 with G/ NNPAs of 3.4/2.3% in FY16 due to slip up in a couple of accounts.

Recommendation

Accumulate PTC India Financial Services Ltd @ 41-42 Stoploss 38 Target 50 CMP 41.60

Indian Market Outlook:

The Indian markets posted modest gains in the last session despite choppy trade, as investors remained optimistic of upbeat corporate earnings results. Today, the start is likely to be soft to cautious on mostly unsupportive global cues. However, markets may see recovery in latter trade and shore up with India emerging as the 'sweet spot' along with neighbour China to rev up the global economic growth at the World Economic Forum (WEF) Annual meet in Davos. Along with China, India was also applauded as a major driving force for world growth with leaders and economists emphasising the need for increased regional cooperation. IT and pharma stocks will be under pressure ahead of Donald Trump's swearing-in as US President today. There will be caution on talks of pricing pressure on pharma, and new H1B norms for IT companies. The aviation stocks will be in action, as more than three dozen airports across India, which today do not handle a single flight, may get connected under the government’s UDAN (UdeDeshKaAamNaagrik) scheme. Bids by interested airlines have been received to connect 43 such new airports for 190 routes. There will be lots of individual result reactions too, to keep the markets buzzing for the day.

TECHNICAL VIEW:

Nifty not able to go anywhere through the week and is stuck in a small range between Gann levels 8373-8465. Imp levels to watch today are 8397-8460 either side rally will happen after a long consolidation during the week. Lower supports on breach of 8397 is 8373-8348-8301. Over all the bullish trend we got from the lows of 7893 had fizzled out and to regain strength Nifty has to close the week ab 8465. There is no major support form the Nifty components except Banking and Financials which also now looks tired. 

BankNifty support 19072 and hurdle 19220. Either side will see a rally. Yesterday saw weakness and was choppy with in a range and trying to get direction.

Conclusion:

Nifty index traded sideways for most past of the passing week but steep sell-off on Friday i.e. 20th January made it settle at the weekly lowest levels. The sell off was due to Donald Trump’s inauguration as the 45th US President. Market participants were seen taking a cautious stance ahead of the same. Overall markets bias remains in favor of the bulls; hence, dips from the current levels can be utilized to accumulate good quality stocks for medium to long-term. For the up coming week, we expect Nifty index to trade in range 8250-8500. Auto and Bankex top our preferred list of sectoral pivots.